Davos, all is well?

Davos and the Klondike theory

Davos 2011
Let's put on a brave face. This seems to be the mood of the moment and we have been here before. Prior to the financial collapse of Greece there was only a little local difficulty to deal with; and then there was Ireland. Our Lords and Masters, fresh from their exertions in Davos, tell us all is well. On behalf of France, Finance Minister Christine Lagarde said -

Let's not short Europe and let's not short the eurozone, - she said to applause from the business and political leaders attending the annual meeting of the World Economic Forum in this Swiss ski resort.

Applause, oh yes, they would have loved that, real "we are the champions" type stuff. There was similar bombast from Germany with Chancellor Merkel suggesting 'austerity' in all things plus, of course, more 'harmonisation' would be preferable to the break up of the eurozone. Well she would say that wouldn't she? But then the attitude of German Chancellors is interesting. Consider former German Chancellor Gerhard Schroeder, just as soon as he was out of office he makes a deal with a Russian company to supply Germany with gas. This was in 2005 and not so many years later Russia played its ace by shutting off, for a short time, gas supplies to the EU. The potential for this behaviour from Russia was obvious from the start. Naturally the heads of governments of the EU met to discuss what to do and more harmonisation of energy resources was suggested. Oh yes, let's not have anything interfere with German industrial output eh? Don't forget this is the same Germany that has signed up to the green agenda that has done so much to close coal mines and nuclear power stations and so increase dependence upon imported energy.

No doubt the people of Greece and Ireland will have their own ideas on the concept of saving the euro at all costs, if those costs imply the sort of suffering they are going through being legitimised, simply to save the German economy. But is it all delusional, this 'we are through the worst' rhetoric coming out of Davos or are we on our way to another major problem? Here in the UK there was a lot of fuss when it was shown that the economy had shrunk by 0.5% in the last quarter of last year. The fuss intensified when there were doubts as to the effects of the severe weather on this fall. Some said yes and some no, it's hard to know as the rise in VAT should have had consumers battling their way to the shops regardless. As the bad weather was not confined to the UK alone we can only assume that consumers on the Continent are made of sterner stuff, as the impression given is that our EU partners are doing well. We have posted on the figures behind the German 'revival' before HERE. Frankly the confidence-cum-bombast from the eurozone is hard to take seriously.

The next thing to take into account is that the credit rating agencies, S&P and Moodys, have downgraded Japan. You may if you wish see this as yet another little local difficulty. And yes it's true the problems in Japan are not the same as in either Greece or Ireland. It's also true that we have been here before. The last downgrade of Japan was nine years ago in 2002. In that year Ireland, the Celtic Tiger, that we posted on that HERE was but a playful cuddly cub and Greece was simply the warm place you went for a holiday. Who would have thought, all those years ago, that today Japan would still be haunted by its past and Ireland and Greece totally busted by their own version of the same thing, a financial meltdown? Also consider in those nine years the value of Japanese exports. Despite, (or perhaps because?) of this vast sum Japan is still in a hole, and to ram the message further home, in all those nine years do you know anyone who has bought either an Irish or Greek made car? If Japan can't get out of trouble what chance Ireland or Greece? Klondike 1899
Our Lords and Masters at Davos are quick to tell us all is well because recent bond sales for EU countries have been over subscribed, they usually are, that was happening last year! There is also much happiness as a lot of the buying is done by China. The financial world has been obsessed by China since the days of Eddie George, Governor of the Bank of England 1993 – 2003. For these people China is the Klondike all over again. It is a bonanza on a grand scale, but this time without the failure, famine or frostbite of the Yukon goldfields in the 1890s. Again this is all so delusional as China is not without its own problems. Around 40% of the people news agency Bloomberg polled think China is due for its own financial crisis in the next few years. Even the government of China is talking in terms of doing all it can to avoid a property bubble, but then so did the governments of Greece and Ireland.

Think again of the way Germany has borrowed money from its own banks, which it then turns around as a statistic showing increased business activity and then presents to the world as an indicator of a booming economy. The question must be "are they fooling themselves as well as others"? The so called emerging nations work similar tricks; China is awash with short-term loans from the banks of more sober nations envious of its 'growth' and keen to cash in on this bonanza. Because this money is short-term the people who put it there aim to get it out quick if something 'goes wrong'. However, if they did move their money quickly and in large quantities then yes, things would go very wrong and very quickly. This we saw with Greece and Ireland.

Think again of the debate between Liam Halligan and Tim Congdon. The latter made a good case for Quantitative Easing in the UK. It's a bit different with China, more gushing than easing. While the economy of China is about a third the size of the US, its money supply is larger. It's this money that is propelling the China building boom. When does a boom become a bubble on its way to bust? The creation of large projects is all very well but do they all go according to plan? It is estimated that about 70 million homes in China are deserted. In a country with such a large population this may seem trivial. But these are second homes, the dreams of the forceful business people who have helped turn China around. You might say they have been foolish, indeed they have. But if this lot crashes it won't be a little local difficulty, it will be global. For the second homes will take out the small businesses that have made the owners rich. Without the small businesses that make the straps for handbags, the small components for electric clocks and all the other essentials there will be nothing to export. The boom will be over.

But for now our Lords and Masters of Davos will put on a brave face and pretend all is well. It will help keep that ultimate vanity project, the euro, going.

Footnote
Historians say that the mania behind the Klondike gold rush was due to the failure of banks in the USA. So, following the discovery of gold in the Yukon the desire to get a part of this wealth was intense. Many people were ruined in this rush.